Bank spending on IT has historically been a major component of the banking budget, especially at the big banks. Huge sums have been invested in banking systems, ERP systems, hardware to support the systems and IT divisions to build and maintain their environment. While this investment was necessary to compete with their rivals and build a substantial client base, we have entered a new era where these legacy systems have become “concrete sneakers”, diverting the bulk of the IT budget into maintenance instead of innovation. Most banks know that they have to undergo a radical transformation if they want to stay relevant, but they still have to maintain their current infrastructure, and there is no quick fix. In a recent report by Protiviti on technology trends in the Financial Sector, they found that only 12% of the overall IT budget was allocated to innovation.
Source: Protiviti (Top Technology trends in Financial Services 2017, p 10)
Is the Transition to Digital Banking Really that Critical?
Well, yes – there really is no alternative. Let’s quote Francisco Gonzàlez, Chairman and former CEO of BBVA, the Spanish bank, with a global footprint in Europe and the Americas:
“A new financial ecosystem is being created. In two decades, we will go from 20,000 analogue banks worldwide today to no more than several dozen ’digital’ banks.”
This is a very bold statement, made by someone who has spent the last 10 years effecting this transformation at BBVA. He understands the dilemma of large banks with legacy systems, and is not very complimenting:
“Most of the banks have started at the rooftop. How did they manage to work without the foundations and the floors? Just middleware — more spaghetti on the spaghetti.”
He speaks with authority. From the financial standpoint since 2007, BBVA has been undergoing its own digital transformation, spending more than €850 million per annum replacing legacy systems with a digital platform. From the technology standpoint, Gonzàlez must be one of the few bankers who started his career as a software engineer. Even with the unusual advantage of a technologically literate CEO, it has still taken BBVA ten years to get to the point where they have a unified digital platform. Competing banks have a long road ahead of them.
For banks that have only started their transformation, or are still waiting to dip their toes in the water, there is still some hope, however. Gonzàlez believes that banks have an advantage over their competitors in the Fintech space – reams and reams of data. While most of this data lies like buried treasure at the bottom of the ocean, once a bank has started to shift to digital, it can start making intelligent use of what it has to enrich a customer experience.
“Banks should become data-driven organizations in order to deliver knowledge banking: new and better financial products and services based on information and better suited to every customer’s needs and expectations.”
If a bank is not going digital, its customers certainly are, and they will move to other banks if they do not get the digital services they are looking for. FIS Global issues the annual PACE (Performance Against Customer Expectations) report that reviews banking trends both globally and locally. Here are some excerpts from their webinar on the 2017 findings.
Source: FISGlobal 2017 Pace Report webinar, page 9
You will notice that, while the use of mobile for banking decreases with the customers’ age, the combination of mobile and online banking is around 70-75% for all age groups. The banks themselves have done their best to effect this change by raising over-the-counter fees to discourage using the branch, and by actually closing branches as well. However, the digital substitutes have not always matched expectations, as shown below.
Source: FISGlobal 2017 Pace Report webinar, page 9
This can cause customer attrition, especially if customers are under 35, or a dilution of loyalty, where they start looking at other banks for a more appealing product.
Source: FISGlobal 2017 Pace Report webinar, page 9
Most banks recognize this, and are on the hunt for new digital products or technologies that will enhance the digital face they show to the customer. There are too many choices to list them all, so we have concentrated on those getting the most attention globally.
Predicted Technologies that Banks will Embrace
Whether or not a bank has moved or is moving to a digital model, all of them recognize technologies that they will need to introduce in the next few years, if they want to remain competitive and relevant. While there is a bewildering choice out there, and priorities vary from country to country, there are some common technologies at the top of every banking CEO’s wish list.
1. Room to Move: A Digital Platform
As Mr Gonzàlez has pointed out, one cannot patch new digital solutions on old foundations, which is what many banks have done in the attempt to keep up with the competition. This is a short-term gain, but with the promise of a long-term pain. So a digital platform is a priority in every research report on banking technology trends.
A digital platform gives a bank the agility to move, change and partner with others, such as fintechs that are offering niche or complementary services. In a report by MIT Sloan’s CISR group, based on BBVA’s remarkable transition to digital, they note that:
“…digital leaders API-enable 44% of their core capabilities so that external partners can connect to them. Digital laggards API-enable only 19% of core capabilities”.
(Is Your Company a Digital Leader or a Digital Laggard? MIT Sloan CISR 2017-03-16)
The question of why you need to have APIs linked into your core takes on a new relevance when you consider Europe’s PSD2 Regulation that requires banks to have open APIs. There is a call for the US to adopt similar legislation. Those banks with a digital platform will find compliance a breeze. Those who are busy unbundling their legacy systems are feeling overwhelmed.
2. Keeping the Wolves from the Door: Cybersecurity
Cyber-threats are the spoiler to any bank’s digital offerings, as well as posing threats to a bank’s valuable store of data and well-oiled operational processes. There is also the compliance aspect in many countries, either as a governmental requirement or as adherence to the Basel Operational Risk directives.
Cyberattackers are developing new threats as quickly as organizations are building defences against them. While there are many reports on cybersecurity, if they were not written in the last two months, they probably did not mention ransomware like WannaCry. The need for identity validation has become vital, especially since most of the interaction between customers and banks is now digital. Even systems such as 2FA (two-factor authentication) have their limitations. While biometrics are starting to gain popularity with retail banks, this is the field where the most potential for authentication lies.
Source: Extract from Deloitte Review Issue 19 “A World Beyond Passwords: Improving security, efficiency, and user experience in digital transformation”
While many banks now use fingerprints as a physical recognition factor, biometrics are becoming more sophisticated and are being combined with other validators, such as one-time passwords, tokens and patterns of usage, to create new multi-factor authentication models. If you consider that the cumbersome set of questions asked by a call centre agent can use up to 50% of the total conversation, there is a need to move to a more agile and productive way of identifying a customer. Pinpoint, a company that specializes in phone-print recognition, estimates that 1 in every 937 calls made to a call centre is fraudulent, a jump of 113% from the previous year (1 in 2000 calls).
3. Capitalize on Big Data with AI
As Gonzàlez says, banks have the advantage of all the data they hold. However, most institutions still have a long way to go before they can realise the business benefit and convert it into business intelligence. First, the walls should be broken down between all the data silos common to most banks. They are usually product based: mortgages, credit cards and vehicle finance each have their own view of the customer, which probably differs from the customer data for the checking account. Second, data quality should be addressed, together with a comprehensive data cleansing exercise to result in a single view of the customer. Once this is done, the linking of social and mobile data can occur. This will enable the bank to build a personalised view of the customer.
Once the data is trusted, different AI solutions can be considered to extract value. AI can be, and is being used by banks in a number of ways to streamline operations and to make the customer interface leaner and more responsive.
Some examples of the use of AI in banking include:
- pattern detection in identifying and preventing fraud
- robotic ‘personalities’, like HSBC’s Olivia in the UK, with relatives Andrew (UK commercial banking) and Amy (Hong Kong Banking)
- Automation of backend processes to save time and costs. A US banking company achieved a 90% reduction in time taken to fix failed trades by using AI and machine learning.
Source: Extract from “Transforming Tomorrow. Delivering Today,” IPSoft’s case studies of AI solutions, pp 6-7
This is only the tip of the iceberg in possibilities that can be unleashed by using AI.
4. Embrace the Competition: Make Friends with a Fintech Company
The fintech market is booming, and the policy should be, “If you can’t beat them, join them.” There is a misconception that fintechs are online banks competing with their traditional contemporaries, but many fintechs are niche service providers that offer a core competency such as behavioral scoring or predictive analysis. True, there are many fintechs that are digital banks, but they offer an opportunity to a traditional bank to form a partnership across a wide range of services. In KPMG’s Fintech survey, the following categories were identified among the top 100 companies globally, and there are at least another 1,400 companies to choose from.
Extract from KPMG and H2 Ventures’ 2016 Fintech 100 Report
One of the most interesting fintech categories is Regtech. These are companies that specialize in regulatory reporting and compliance, which is a heavy burden for any financial institution. The number of regtech companies is increasing.
5. And of Course, there’s Blockchain
When the mysterious person, or a few of them, known as Satoshi Nakamoto, wrote the white paper that led to the formation of Bitcoin, it was really about a new way of managing transactions. Blockchain technology is fast, tamperproof, democratic and has the potential to change the world as radically as the Internet. The use of blockchain is both a threat and an opportunity to all banks. The threat lies in blockchain’s ability to disintermediate every player who was making some profit from handling a transaction. The opportunity can be found in major cost savings when using blockchain for convoluted and complex transactions, such as trade finance.
90% of banks interviewed by Accenture for a report on blockchain indicated that they are looking at the use of Blockchain
Source: Accenture’s “Blockchain Technology: How Banks are Building a Real-Time Global Network”, 2016
Taking Up the Challenge: Where to Start
While every banker recognizes the value in all the technologies listed above, the challenge lies in finding the right mix and the right approach for one’s own bank. Early adopters have made it easier to follow in their pathways, but there will still be trial and error along the way. It will also take time; if it took BBVA a decade to reach a point where they are confident in their transformation, it would be unrealistic to assume it can be done in half the time.
In our next article we will look at how you can make this transition easier. The real trick in achieving a digital presence is that it involves people, working with them, enthusing them and creating a culture where change is welcomed. Committed leadership is the secret sauce for all change initiatives. Without it, the most enticing technology will languish and die through the lack of adoption, either by the workforce or by the customer.